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Series of Disasters Spark Lloyd's Mergers

It's an ill wind that blows nobody any good – but try telling that to Lloyd's insurance brokers.

Last year the industry was hit by the second worst year on record for catastrophe losses, which topped £69billion, according to the world’s second biggest reinsurer Swiss Re.

These losses were a result of earthquakes in Japan and New Zealand, floods in Australia and Thailand, wildfires in Texas and tornadoes in the US. Only 2005, which saw the sector suffer Hurricanes Katrina, Wilma and Rita, was more costly at £76.7billion.

To put 2011 and 2005 in perspective; they were both more devastating than 2001, the year of the attack on New York’s twin towers.

The effect of these losses is splitting Lloyd’s in two. The sharper players are faring well. But some of the small outfits at the 324-year-old City institution are being forced into mergers.

Just last week Omega Insurance (up 0.12p to 54.38p) rebuffed a second takeover approach from privately-held rival Lloyd’s underwriter Barbican Insurance. Omega said it would not recommend the deal to its shareholders, because it offered worse terms than the first approach by Barbican made last September. Last month another privately- held rival, Haverford, also ended talks over buying a stake in Omega, which is valued at around £133million.

But as a result of such heavy losses last year, global property catastrophe insurance rates have recently risen 10 per cent, and analysts say the most agile insurers will be able to take advantage of this.

Peel Hunt analysts Mark Williamson and Sarah Lewandowski have taken a look at Lloyd’s and have picked out a few insurers to watch this year.

Among the larger players the broker rates Lancashire (down 12p to 705p) as ‘the most disciplined underwriter’ it covers.

They are impressed by the way the firm does not wildly chase business.

Lewandowski said: ‘Capital is readily returned when it cannot be used advantageously for shareholders, with a special dividend of 51p per share being paid in November.’

Among mid-cap players, the broker was impressed with Beazley (up 1.6 to 142.1p) which, because of its ‘balanced portfolio’, was able to turn in a profit of £27.4million last year in difficult circumstances.

In the small-cap space Peel Hunt chose Novae (up 2.5p to 337.5p) because of its solid track record. Lewandowski said: ‘Since 2009 Novae has systematically delivered on each of the objectives it set out in its return of capital and strategic targets.’

The FTSE 100 edged down 61.75 to 5733.45, drifting from a six-month high yesterday, as investors showed their disappointment with the lack of a deal on Greek debt.

While in New York the Dow Jones industrial average was down 37.31 points to 12,697.32 in early trading after data showed the US economy grew by 2.8 per cent in the final quarter of 2011, undershooting forecasts of 3pc but well ahead of the previous quarter’s 1.8 per cent rate.Back in London, InterContinental Hotels fell 36p to 1,321p, after a rating cut from UBS.

The operator of the Crown Plaza and Holiday Inn chains slipped after the broker reduced its rating on the stock from ‘neutral’ to ‘sell’ on valuation grounds.

Imperial Tobacco, which like other defensive tobacco and pharmaceutical stocks does well in tough times, rose 36p to 2,289p.

Citigroup lifted its target price on Imperial to 2,570p from 2,550p, as it repeated its ‘buy’ rating, saying its recent share price weakness has been overdone.

African Barrick Gold performed well among the FTSE 250 risers after it upgraded its estimates of the amount of gold within its Nyanzaga mine in Tanzania. The stock gained 26p to 515.5p.

Catalogue shopping retailer N Brown also stood out, rising 2.9p to 234.3p after analysts at UBS upgraded their rating on the stock from ‘neutral’ to ‘buy’.

Marketing group Creston saw its shares tumble 15.62p to 51p, after warning on its outlook. Chief executive Don Elgie is following listed rivals such as Huntsworth and Chime Communications by cutting costs.

Elgie said ‘we are winning more than our fair share of business,’ but admitted times are tough because ‘the industry is changing’ in the age of digital media.

Banknote printer De La Rue edged up 1p to 967.5p after it said trading is in line with expectations and will continue with its cost cutting plans. It plans to save £30million over three years.